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APPLIANCES Still a waiting and wishing game in housing starts

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The freeze in the housing market has had a chilling effect on the amount of steel being consumed for use in major appliances like refrigerators and stoves. The number of new homes being built doesn't tell the whole story, however, being just one element affecting appliance market health.

To get a better read on the appliance market, ArcelorMittal managers point to multiple sources.

"There are at least three factors that drive major appliance sales the housing starts, the replacement market and the remodeling market," Amy Ebben, marketing analyst at ArcelorMittal, said. "The housing is easiest to watch. It has hard and fast stats."

U.S. Census Bureau data shows housing starts fell between 30 and 35 percent in the first quarter compared with the first three months of 2006, she said. But major appliance sales in the United States were down just 6.6 percent through May vs. the first five months of last year, according to the Association of Home Appliance Manufacturers. "That shows the other markets have remained fairly strong," Ebben said.

And that's good for ArcelorMittal and other steelmakers that produce the metal used to manufacture major appliances.

When it comes to remodeling, other factors like consumer spending, employment and interest rates also play a role, Roy J. Platz, ArcelorMittal's director of marketing, said. "There's been relatively good consumer spending through the first five months of the year and we've seen a very strong employment picture with positive wage growth." These factors, plus more people refinancing mortgages and taking out lower-interest home equity loans, have led to remodeling projects that include new appliances. "You can understand trends, so you don't have to have hard and fast stats," Platz said.

The executives declined to specify just how far ArcelorMittal's steel sales for the appliance market have dropped.

"We'd love to see appliances a bit stronger," Platz said. "But they're not down as much as they might be, given the dip in housing starts. We don't see a strong recovery in the housing market maybe through 2008. We're looking at a fairly lengthy drought on that end. But by the same token, we see the economy improving quarter to quarter. Everything else is looking positive except housing; even autos look better."

AK Steel Corp., Middletown, Ohio, also has seen appliance, construction and manufacturing sector business decline with housing starts. However, the company anticipates a turnaround, James L. Wainscott, AK Steel's chairman, president and chief executive officer, said during the company's first-quarter earnings call earlier this year. "Based on what we see and hear, the worst of the housing slump has passed and that sector should show an improving trend through 2007."

An AK Steel spokesman declined to discuss the company's current status on these sectors, preferring to keep all comments within the scope of the public calls.

One positive trend that ArcelorMittal has seen in regard to appliance consumption is that baby boomers' children are growing up. "There are fairly positive demographics as Generation Y comes of age and starts household formation," Platz said. "And you have us baby boomers still around, too."

Those new homeowners and remodelers have turned increasingly to stainless steel as a style. "Stainless has been popular for a while," Platz said. His company produces both carbon and stainless products worldwide. "I don't know if stainless is here to stay, with the fickle nature of things."

The high price of stainless steel resulting from increased nickel costs has been driving some substitution. Allegheny Technologies Inc., Pittsburgh, said appliance makers have been switching to less-expensive stainless material as a way to lower their costs while maintaining the look consumers want.

ATI, for example, saw a significant volume of Type 304 cold-rolled sheet sales replaced with Type 201 stainless during the first quarter vs. the same period a year earlier, L. Patrick Hassey, the company's chairman, president and chief executive officer, said earlier this year during the company's quarterly earnings conference call. Type 201 has about half the nickel content of Type 304. "Customers in the food equipment and appliance market have switched and others are switching every week," he said.

ATI failed to return numerous calls seeking updated information.

Although the appliance market is soft overall for steel manufacturers, other areas of business are making up for it. "Construction and energy is extremely strong," Platz said, "so that's getting us through this slow spot in the economy. There certainly have been other areas of strength."

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